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Those unfamiliar with cryptocurrencies, such as institutional investors who recently bought into bitcoin’s digital gold narrative, may now be looking around for the next big thing.
With the long-awaited arrival of the Ethereum 2.0 update on December 1st, that could be the network’s native token, the ether. But analysts say the ether should be judged on its merits and not as a substitute for bitcoin.
“I’ve always thought this digital asset space is huge – and it’s not just bitcoin – because there will be different applications for different things,” said Raoul Pal, CEO and co-founder of financial media group Real Vision, in Real Il. Vision documentary “Ethereum – An Investigation”, released on November 30th. “I think of the two [bitcoin and ether] like having a very good combined asset allocation. “
For Pal, an early bitcoin investor, the logic seems even more plausible these days: as the price of bitcoin reaches a new all-time high, the number one cryptocurrency by market cap is now more expensive and therefore potentially a riskier bet. for new investors.
Investors can be expected to be looking for a new opportunity in affordable cryptography. As ether is trading around 59% below its all-time high of $ 1,432.88, it is tempting to believe there is a bargain to be made. Furthermore, the Ethereum 2.0 update to increase network scalability, security and energy efficiency has generated a lot of hype.
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However, at least for now, analysts and traders who have spoken with CoinDesk do not think that the ether will replace the FOMO on bitcoin.
“For institutional investors, they are buying BTC for the digital gold narrative,” Messari senior research analyst Ryan Watkins told CoinDesk. “ETH isn’t in that conversation yet.”
Ether “benefits from the spillover and probably has more conversations about it from crypto-natives,” Vishal Shah, founder of the Alpha5 derivatives exchange, told CoinDesk. “For those who don’t know, [it is] difficult to see how bitcoin is not the only access ramp. “
Weakening of the correlation between bitcoin and ether
Some analysts say that as more institutions pour money into bitcoin and raise its price, ether and other cryptocurrencies will gradually separate from bitcoin.
In fact, while bitcoin hit a record price this week, ether is nowhere near its all-time high of $ 1,448.18. CoinDesk data shows that the 90-day correlation coefficient between the prices of the top two cryptocurrencies, while still strong, has gradually weakened a bit since the summer from 0.93 to nearly 0.7 in early December.
“The problem with correlation is that it can disappear at any moment,” Ashwath Balakrishnan, a research analyst at digital asset research firm Delphi Digital, told CoinDesk. “In that case, you want to understand the fundamentals of what you hold because if you hold the ether as a proxy [to your] bitcoin exposure e [when] prices decouple, you are now exposed to something very different. “
Bitcoin has been used by many investors this year as a hedge against a decline in the purchasing power of US dollars. Ether is considered the currency of the “world computer”, which aims to build an ecosystem of decentralized applications, according to Balakrishnan.
The close historical correlation between bitcoin and other cryptocurrencies may be due to how small the digital asset ecosystem is compared to the global economy. The total market capitalization of crypto assets is estimated at $ 562 billion, just 1.7% of the combined market capitalization of the S&P 500 Index of $ 32.2 trillion. With almost all cryptocurrencies built on different fundamentals, non-bitcoin cryptocurrencies could be trending with bitcoin prices simply because the nascent market is still so small and isolated.
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The correlation data doesn’t tell the whole story. Prices may vary in tandem, but the degree to which this happens is another matter. When the explosive boom in decentralized finance (DeFi) hit the market over the summer, the price of Ethereum soared in more than two years because most DeFi projects are based on the Ethereum blockchain. At the time, bitcoin was struggling to break a similar two-year record.
What Ethereum 2.0 could mean for investors
The market will have to wait and see what kind of real impact the ongoing Ethereum update on its native currency could have because the final stage of the process is expected to be completed in 2023. But a major fundamental update on the network behind Ether could bring the its price moves on its own fundamentals, instead of simply following the bitcoin price.
“The heart of ETH 2.0, which makes the whole system possible, is the ether,” according to a report by Messari. “ETH will not only be Ethereum’s native store of valuable assets and fuel for transactions, it will also be Ethereum’s ultimate source of security due to its role in [proof-of-stake] system.”
Therefore, while bitcoin can be seen as a middle ground between a store of value and a commodity in the “asset superclass triangle”, the ether could eventually become the first asset to be a combination of all three asset classes. assets: capital goods, goods and deposits of value.
“When Ethereum’s price starts to be driven by its own catalysts, considering it as a proxy of BTC exposure will not work as expected,” added Balakrishnan.
